WORLD TRADE  
ORGANIZATION  TN/AG/SCC/GEN/8 
26 March 2007 
 (07-1271) 
Sub-Committee on Cotton Original:   Spanish 
  
 
 
HIGH-LEVEL SESSION ON COTTON 
15-16 MARCH 2007 
 
Communication from Argentina
 
 
  The following communication, dated 15 March 2007, is being circulated at the request of the delegation of Argentina.  
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 1. The cotton situation is emblematic of the di stortions affecting international trade in 
agricultural commodities.  Such distortions stem  from the application of production and export 
subsidies and market access restrictions and have  a severe impact on the developing countries. 
2. In Argentina's case, cotton production contracted by 80 per cent between 1998 and 2002 
because of low international prices resulting from the domestic subsidies granted by a number of 
countries.  Adverse weather conditions caused further contraction of the sector, making Argentina a net importer of cotton as of 2002/2003.
1 
3. The cotton issue has reached lif e-threatening proportions in African countries, because the 
cotton sector and the textile industry account for betw een 5 per cent and 9 per cent of GDP and 70 per 
cent of exports, in addition to constituting the main  source of employment in Benin, Burkina Faso, 
Mali, Chad and Togo. 
4. This "emblematic" situation of the distortions affecting international agricultural trade calls 
for urgent solutions.  This is as the matter was understood by WTO Members in Doha in 2001. 
5. Nevertheless, some WTO Members with a greater  degree of responsibility in this situation 
have failed to adopt the requisite measures pursuan t to their multilateral commitments, not only under 
the Doha mandate but also under the Uruguay Round. 
6. Argentina's communication focuses more specifi cally on the latter aspect, because ignorance 
of multilateral undertakings on the cotton issue sends  a disturbing signal not only in terms of the 
options for pursuing the agricultural reform proces s but also as regards the very stability of the 
GATT/WTO system. 
                                                      
1 During the 1996/1997 season, Argentina imported 1,000 tonnes and exported 290,000 tonnes of 
cotton, whereas it exported 6,000 tonnes and imported 53,000 tonnes in 2002/2003.  Secretariat for Agriculture, Livestock, Fisheries and Food (SAGPyA) report dated 28 February 2007:  " Algodón, Subsidios y Africa " 
(Cotton, Subsidies and Africa). TN/AG/SCC/GEN/8 
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  Subject
: 
 
2007 proposals for Farm Bill 2008-2012 and the DSB recommendations in the Brazil-US dispute 
on cotton subsidies (8 September 2004) a nd their relationship to the Doha mandate2 
Objectives : 
7. To determine whether the recent proposals for Farm Bill 2007 presented by the US Executive 
(USDA, announcement by Agriculture Secretary Mi ke Johanns on 31 January  2007) are consistent 
with the Doha mandate and the Uruguay Round commitm ents undertaken by the US, as well as with 
the Panel recommendations in the dispute on US cott on subsidies, brought by Brazil against the US. 
8. The outcome of the above will be indicative of  the degree to which the US is politically 
committed to the ongoing negotiations and to th e GATT/WTO system as a whole, since faithful 
observance of existing trade disciplines is essential fo r the credibility of the Doha Round negotiations 
on new multilateral rules. 
2007 Farm Bill proposals and the DSB recommendations in the cotton dispute 
9. In reference to cotton, the Farm Bill proposals provide for the following:  
 (1) Increase of direct payments ("green box"); 
  (2) elimination of "Step 1" and "Step 3" to complement the repeal of "Step 2";   (3) elimination of the limitations on planting flexibilities;  
 (4) maintenance of counter-cyclical pa yments and marketing loan programs. 
 
65 per cent increase of direct payments to be implemented in the first year (2008-2009)
3 
10. Direct payments are based on the value of production and on fixed acreage during a 
previously defined base period.  On those grounds, the US Government insists that such support is 
"decoupled" from production4 and should therefore come under the "green box".  It should be pointed 
out, however, that the reference base period for the calculation of payments was 1968-1988 until 
2002, but was updated to 1998-2001 in Farm Bill 2002.  Since the value of production and the acreage 
increased over that period, the level of subsidies in creased as well.  Thus, it can be said that updating 
the base period "recoupled" subsidies to production levels. 
11. Recent proposals do not suggest updating the base for direct payments, although they do 
emphasize that while commodity prices are expected to  remain stable or to increase over the next few 
years, cotton is an exception.  Given the comb ined increase in acreage under crop and declining 
US textile production, a substantial increase in cotton programme expenditures is expected, as 
compared to other commodities. 
                                                      
2 The cotton issue is also addressed from the standpo int of "development assistan ce" (paragraph 1.b. of 
the General Council Decision of 1 August 2004 and paragraph 12 of the Hong Kong Ministerial Declaration, 
13-18 December 2005). 
3 The current rate for cotton is 6.67 (cents/lb), and the rate proposed for the periods 2008-2009 and 
2010-2012 is 11.08 (cents/lb). 
4 "Direct payments that are decoupled from price and production as a general rule are compliant with 
trade rules ", "Remarks by Agriculture Secretary Mike Johanns, as he unveiled USDA's 2007 Farm Bill 
Proposals", Washington, D.C., 31 January 2007.  TN/AG/SCC/GEN/8 
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  Elimination of "Step 1", "Step 3" and "Extra-Long Staple" 
12. The subsidies known as "Step 2" in Farm B ill 2002 are payments made to exporters and 
domestic users (textile industry) that are trigge red when domestic cotton prices in the US exceed 
international prices for a certain period of time, so as  to keep export prices in line with the low costs 
of external competitors.  The DSB established that, in that part of the programme requiring cotton to 
be exported in order to be eligible  for the subsidies, "Step 2" violated Article 3.1(a) and 3.2 of the 
Agreement on Subsidies (prohibition of subsidies subordinated to export).  Moreover, "Step 2" for 
exporters is an export subsidy with in the meaning of Article 9.1(a) of the Agreement on Agriculture.  
Since cotton is a product concerning which the US has not bound any export subsidy commitment, any payment granted for cotton under that heading would constitute a breach of Articles 3.3 and 8 of 
the Agreement on Agriculture. 
13. As regards payment of the subsidy to the te xtile industry, the DSB concluded that it 
constituted a prohibited subsidy under Article 3.1(b) and 3.2 of the Agreement on Subsidies 
(prohibition of subsidies subject to the use of domestic goods instead of imported goods). 
14. The DSB set the time-limit for removing the subsidy at 1 July 2005, in accordance with 
Article 4.7 of the Agreement on Subsidies. 
15. The US abolished "Step 2" on 1 August 2006. 
16. The 2007 proposals provide for the eliminati on of the three provisions complementing 
"Step 2", namely "Step 1" concerning discretional adju stment of the "loan repayment rate";  "Step 3" 
concerning a special cotton import quota that is trigge red according to the US cotton price in northern 
Europe;  and "Extra-Long Staple", a payment similar to "Step 2", which is granted to domestic users 
and exporters. 
Elimination of limitations on planting flexibilities 
17. In the cotton dispute, the DSB determined th at direct payments under Farm Bill 2002 could 
not be regarded as "green box" support because of  the provisions relating to limitations on planting 
flexibilities, which exclude fruits, vegetables and wild rice from eligibility for support. 
18. Since the passing of Farm Bill 1996, US produ cers have had flexibility to adopt their own 
planting decisions, although fruits and vegetables ha ve been excluded and are therefore not eligible 
for direct or counter-cyclical payments.  Farm  Bill 2002 included wild rice in the exceptions. 
19. The 2007 Farm Bill proposals recommend that these pr ovisions be removed, so that the direct 
green box payments provided for therein meet the crit erion of having no – or no more than minimal – 
distorting effects. 
20. The elimination of these measures seeks to bri ng direct payments "conceptually" into line 
with the Cotton Panel rulings.  However, removal of  the provisions in question has no direct incidence 
on the distorting effects of cotton support. 
Counter-Cyclical Payments (CCP) and Marketi ng Assistance Loans (ML) are maintained 
21. The DSB determined that the subsidies known as "Marketing Assistance Loans", "Step 2" and 
"Counter-Cyclical Payments" caused serious injury to Brazil because of their significant depressive 
effect on the international price of cotton, in viol ation of Articles 5 and 6.3(c) of the Agreement on 
Subsidies.  These programmes directly related to price levels insulate US producers from market 
signals and lead to artificial production of surp luses which, once placed on the world market, cause TN/AG/SCC/GEN/8 
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  market prices to fall or prevent prices from in creasing as they should.  These subsidies reached 
US$12.5 billion between 1999 and 2002.  The US cotton crop produced in the same four-year period 
amounted to US$13.9 billion, i.e. an average rate of subsidy of 89.5 per cent. 
22. The DSB set at 21 September 2005 the time-limit for the US to remove the subsidies or to 
eliminate their adverse effects, in accordance w ith Article 7.8 of the Agreement on Subsidies. 
23. When the DSB issued its ruling, the "Marke ting Loan Program" guaranteed producers an 
income of 52 US cents/lb of cotton produced.  If prices fell below that level, the US Government 
made up the difference. 
24. The 2007 proposals provide for an average "loan rate" for cotton ranging from 
0.4570 US cents/lb to a maximum of 0.5192 US cents /lb in the period 2008-2012.  This means that 
not only the ML programme but also the level of rates per unit is maintained. 
25. When the DSB ruling was issued, counter-cycli cal payments were granted to make up the 
difference between the target price for cotton, fixe d by the government at 72.4 US cents/lb, and the 
prevailing market price or the 52 US cents/lb  "loan rate", whichever might be higher. 
26. The 2007 proposals maintain the loan rate  for CCPs at 52 US cents/lb for cotton. 
27. It should be noted, however, that the propo sals provide for the "re-direction" of 
counter-cyclical payments and marketing loans. 
28. It is proposed to convert CCPs into income support programmes for producers.  The "new" 
CCPs will operate as follows:  The payment of inco me (income guarantee) to the producer will be 
triggered when the national income per acre fall s below a target national income fixed by the 
government.  The target national income will be calcu lated as follows:  Target price for CCPs set in 
Farm Bill 2002, less the direct payment rate for the average national acreage of the commodity in 
question in the period 2002-2006. 
29. The current national income is determined by the highest average national acreage price 
between the average market price and the loan rate for the commodity concerned.  A fall in the current 
national income below the target national income  triggers the income support payment to the 
producer. 
30. Guaranteed income means guaranteed profit, rega rdless of market prices.  In other words, 
even if prices were to fall, farmers could receive higher incomes than they would if market prices 
were higher. 
31. The updating of the base period to 2002-2006 in the case of the "new" CCPs would guarantee 
a high level of income to producers, since prices are generally high. 
32. Clearly, the "new" CCPs are not consistent with the current blue box criteria (Article 6.5 of 
the Agreement on Agriculture) or with the crite ria for direct payments exempt from reduction 
according to Annex II (paragraphs 5 and 6, subparagraphs (b) to (e)), and must therefore must be 
considered as belonging to the "amber box" categor y and, as such, subject to reduction commitments. 
33. As far as the MLs are concerned, the reform proposed is that the loan rate should be 
determined each year on the basis of the average of the lowest prices per commodity in the preceding 
five years (i.e. for the current year on the basis of the average for 2002-2006), the highest and the lowest price being eliminated.  The ceiling adopte d is the loan rate established by Congress in 2002.  TN/AG/SCC/GEN/8 
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  34. The "new" MLs still have distorting effects, as do the CCPs.  The difference lies in the fact 
that the US has always notified marketing loans (1995-2001) as amber box payments and therefore subject to reduction commitments. 
Proposals for Farm Bill 2007 and the Doha mandate 
35. As stated earlier, even if the cotton proposals abolish mechanisms relating to "Step 2" (export 
subsidies), "Step 1"and "Step 3", and the provisi ons on limitations of planting flexibilities described 
above, they are expected to represent an increase in  "decoupled" direct payments, while maintaining 
the counter-cyclical payments and the marketing loans. 
36. Direct payments in general will increase by US$5.5 billion for the Farm Bill 2007 
implementation term (2008-2012).  In the specific case of cotton, the increase will be 65 per cent of 
expenditures in 2006. 
37. Thus, the proposals do not only disregard the recommendations of the Cotton Panel but they 
are also contrary to the Doha engagement to address the cotton issue " ambitiously, expeditiously and 
specifically " within the agricultural negotiations, that is, with respect to all distorting policies 
affecting the sector in each of the three pillars. 
38. The Hong Kong Ministerial Declaration (2005) reaffirmed the engagement to assure an 
explicit  decision on cotton in the framework of th e negotiations on agriculture, specifically: 
 (1) Every and all ways of export subsidies shall be eliminated by developed countries in 
2006; 
  (2) the duty-free, quota-free access for LDCs cotton exports shall be applied by 
developed countries as of the beginning of the implementation period; 
  (3) the reduction of subsidies to cotton produc tion shall be more ambitious than any other 
formula to be agreed on and shall be implemented in a shorter term than the one generally applied.  Members stated their enga gement to set priority to this aim in the 
context of negotiations. 
 39. Five years have elapsed and the Doha mandate has not been implemented.  More than one 
year has gone by and the cotton issue has not ye t been addressed with the expeditiousness and 
urgency it requires, as is so clearly conveyed by the Hong Kong Ministerial Declaration. 
Conclusions 
40. The proposals for the Farm Bill which will span the period 2008-2012 send a disturbing 
signal in terms of the future of the definition of new rules for multilateral agricultural trade. 
41. Failure to fulfil engagements concerning th e cotton issue under the Doha mandate casts 
serious doubt on the political will of all WTO Member s to pursue and deepen the agriculture reform 
process initiated during the Uruguay Round. 
42. The granting of cotton production and export subsidies casts serious doubt on the 
commitment of developed country Members to  what is known as the "Doha Round development 
dimension", since cotton is the main export commodity and source of income for many developing countries – particularly the least developed countries. 
 TN/AG/SCC/GEN/8 
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  43. Settlement of the cotton issue ac cording to the terms of the Doha mandate will be the guiding 
principle necessary to firmly channel the negotiati ng process towards the long-term goal of achieving 
fair and market-oriented agricultural trade. 
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